1. Part I: The Strategic Position
Change to 9th Edition and change title to Exploring Strategy. Update design

2. The focus of part I: the strategic position
How to analyse an organisation’s position in the external environment.
How to analyse the determinants of strategic capability – resources, competences and the linkages between them.
How to understand an organisation’s purposes, taking into account corporate governance, stakeholder expectations and business ethics.
How to address the role of history and culture in determining an organisation’s position.

3. Strategic position

4. The Strategic Position 2: The Environment
Update: Change to 9th edition and title to Exploring Strategy

5. Learning outcomes (1)
Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, ecological and legal factors (PESTEL).
Construct alternative scenarios in order to address possible environmental changes.

6. Learning outcomes (2)
Use Porter’s five forces analysis in order to define the attractiveness of industries and markets and to identify their potential for change.
Analyse strategic and competitor positions in terms of strategic groups, market segments and ‘Blue Oceans’.
Use these various concepts and techniques in order to recognise threats and opportunities in the market place.

7. MMM365 Learning Outcomes Students should be able to:
examine systematically the internal and external business environments of a firm
apply relevant theories, models, frameworks, tools, and techniques in strategy formulation, strategy implementation, and strategy evaluation in a variety of business and industry contexts
recommend strategic propositions and directions through individual and team-based decision-making
design a strategic action plan for a specific firm

8. Industry Macro-environment PESTEL Framework
(Key drivers for change)
External Factor Evaluation (EFE) Matrix
(Opportunities and Threats)
Porter’s Five Forces Model
Types of Industry
Industry Life Cycle
Scenario Analysis
Competitive Cycles
Industry Dynamics
Industry Structure Analysis
Competitive Profile Matrix (CPM)
Strategic Groups and Market Segments
Strategic Group Mapping
Industry
Blue Ocean Thinking
Critical Success Factors

9. Layers of the business environment

10. The PESTEL framework (1)
The PESTEL framework categorises environmental factors into six key types: Political Economic Social Technological Ecological Legal PESTEL helps to provide a list of potentially important issues influencing strategy. It is important to assess the impact of each factor.

11. The PESTEL framework (2)
Political factors: The role of the state e.g. as an owner, customer or supplier of businesses. Other political factors include government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (e.g. expansion of EU; ASEAN integration into common market).
Economic factors: The role of macro-economic factors. This includes business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, differential growth rates around the world.

12. The PESTEL framework (4)
Social factors: Including changing cultures and demographics. Examples are the ageing population in Western societies, income distribution, lifestyle changes, consumerism, changes in culture and fashion.
Technological factors: New discoveries and technology developments. Examples include developments on the internet, nano-technology or the rise of new composite materials.

13. The PESTEL framework (5)
Ecological factors: This refers to ‘green’ environmental issues, such as pollution waste and climate change. Examples are environmental protection regulations, energy problems, global warming, waste disposal and re-cycling.
Legal factors: Legislative and regulatory constraints or changes. Examples are IPR, competition law, health and safety law, employment law, liberalisation of trade law.

14. Key drivers of change: Focus of PESTEL Analysis
Key drivers for change:
The environmental factors likely to have a high impact on the success or failure of strategy.
Typically key drivers vary by industry or market.
For example, retailers are concerned with social changes and customer behaviour which have driven a move to ‘out of town’ shopping. Personal disposable income also drives demand for retailers.

15. Using the PESTEL framework (1)
Megatrends – large-scale changes that are slow to form but influence many other activities over decades to come. Examples include ageing populations and increased economic growth in Asia.
Inflexion points – when trends shift sharply upwards or downwards. E.g. sub-Saharan Africa may have reached an inflexion point after decades of stagnation (and may embark on a period of rapid growth).

16. Using the PESTEL framework (2)
Apply selectively – identify specific factors which impact on the industry, market and organisation in question.
Identify factors which are important currently but also consider which will become more important in the next few years.
Use data to support the points and analyse trends using up-to-date information.
Identify opportunities and threats – the main point of the exercise!

17. External Factor Evaluation Matrix Steps to a structured PESTEL analysis (David 2009)
List key external factors (opportunities and threats – the key drivers for change)
Weight from 0 to 1 (i.e. strategic importance)
Rate effectiveness of firm’s current strategies in addressing the external factors (1- poor, 2-average, 3-above average and 4-superior)
Multiply weight * rating
Sum weighted scores

18. EFE Matrix for a Local Ten-Theater Cinema Complex
Total weighted score:
1.00 to 4.00
1.00: poor response
2: average response
3: above average response
4.00 –
very effective response to environmental factors

19. Why develop and use an EFE matrix?
identify and focus on key drivers for change
focus on strategic issues
synthesis of potentially long and complex lists of PESTEL factors
effective presentation of critical information

20. Example: Retail – Supermarket Industry in Australia Key Drivers for Change:
Real household disposable income
Consumer sentiment index
Population
Expenditure on hotels, cafes, and restaurants

21. External Factor Evaluation Matrix (e. g. from a focal firm’s [e. g
External Factor Evaluation Matrix (e.g. from a focal firm’s [e.g. ALDI] perspective)
Key External Factors
Weight
Score
Weighted Score
Opportunities
Slight increases in real household disposable income
.20 ?
Increasing urbanisation across Australia
Increasing number of value conscious and convenience-driven consumers
Improving consumer sentiment index
.05
Threats
Lifestyle change – eating out
.10
Increase demand for prime retail locations
.15
Social and environmental sustainability pressures
Total Weight
1.00

22. Scenarios
Scenarios are plausible views of how the environment of an organisation might develop in the future based on key drivers of change about which there is a high level of uncertainty.
Build on PESTEL analysis and drivers of change.
Offer more than a single view. An organisation will typically develop a few alternative scenarios (2–4) to explore and evaluate future strategic options.
Scenario analysis is used in industries with long planning horizons, for example the oil industry or airlines industry.

23. Carrying out scenario analysis (1)
Identify the most relevant scope of the study – the relevant product/market and time span.
Identify key drivers of change – PESTEL factors which will have the most impact in the future but which have uncertain outcomes and are mutually independent.
For each key driver select opposing outcomes where each leads to very different consequences.

24. Carrying out scenario analysis (2)
Develop scenario ‘stories’. That is, coherent and plausible descriptions of the environment that result from opposing outcomes.
Identify the impact of each scenario on the organisation and evaluate future strategies in the light of the anticipated scenarios.
Establish early warning systems. Identify indicators that might give an early warning of the way the environment is changing and monitor such indicators.

25. Scenarios for supermarket shopping in Australia
Broad/Mega Assortment/
One Stop
Limited/Specialty Shopping
Premium service/high price
Low price/self-service

26. Broad/Mega Assortment/ One Stop Out of town shopping
E-Shopping
Broad/Mega Assortment/
One Stop
Out of town shopping
Brick and Mortar Store
Limited/Specialty Shopping
CBD Shopping
Premium service/high price
Low price/self-service 26

27. Industries, markets and sectors
An industry is a group of firms producing products and services that are essentially the same. For example, the automobile industry and the airline industry. A market is a group of customers for specific products or services that are essentially the same (e.g. the market for luxury cars in Germany). A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector).

28. INDUSTRIES AND MARKETS
industry:
a group of firms that supplies a particular market
Banking Industry
(Commonwealth Bank, Westpac, NAB, ANZ, St George, etc.)
MARKETS (buyers) for
personal financial services (YOU!)
business or corporate financial services
Industry analysis – analysis of strategic conduct and performance of industry players (firms), the major forces/trends shaping an industry, and the critical factors that define success and failure of firms within an industry
Market analysis - analysis of market characteristics (e.g. consumer tastes and preferences), size, growth rate, profitability, trends, attractiveness, key success factors
Refer to section header: DESCRIBING INDUSTRY STRUCTURE
Industries and markets
Economists define an industry as a group of organisations that supplies a market.
Hence, a close correspondence exists between markets and industries.
The principal difference between analysing industry structure and analysing market structure is that industry analysis looks at industry attractiveness as a reflection of competition between specific markets, such as suppliers, customers and substitutes.

29. The Industrial Organisation (I/O) Paradigm
External (e.g. industry) environmental factors are more important than internal (organisational) factors for achieving competitive advantage
The competitive advantage and performance of firms are determined primarily by industry forces
Competitive advantage is determined largely by competitive positioning within an industry
Firms succeed or fail depending on how they respond to the pressures or factors in their industry
Highlights the importance of understanding the nature and dynamics within a given industry

30. Industrial Organisation (I/O) Paradigm (e.g. Porter 1981)
Industry Structure
Conduct (Strategy)
Performance
External (e.g. industry) factors drive strategy development and strategic choices of a firm, and ultimately determines performance outcomes.

31. Competitive forces in an industry: The Five Forces Framework
Porter’s Five Forces Framework helps identify the attractiveness of an industry in terms of five competitive forces:
the threat of entry
the threat of substitutes
the bargaining power of buyers
the bargaining power of suppliers and
the extent of rivalry between competitors.
The five forces constitute an industry’s ‘structure’.

32. The Five Forces framework (1)
Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors The Free Press by Michael E. Porter, copyright © 1980, 1998 by The Free Press. All rights reserved.

33. The Five Forces framework (2)
Rivalry between existing competitors
Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (distinct from substitutes).
The degree of rivalry increases when:
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high
There is a low level of differentiation.

34. The Five Forces framework (3)
The threat of entry
Barriers to entry are the factors that need to be overcome by new entrants if they are to compete. The threat of entry is low when the barriers to entry are high and vice versa.
The main barriers to entry are:
Economies of scale/high fixed costs
Experience and learning
Access to supply and distribution channels
Differentiation and market penetration costs
Legislation or government restrictions (e.g. licensing)
Expected retaliation from incumbents.

35. The Five Forces framework (4)
Threat of substitutes
Substitutes are products or services that offer a similar benefit to an industry’s products or services, but have a different nature i.e. they are from outside the industry.
Customers will switch to alternatives (and thus the threat increases) if:
The price/performance ratio of the substitute is superior (e.g. Aluminium is more expensive than steel but it is more cost efficient for car parts)
The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centre on short haul routes).

36. The Five Forces framework (5)
The bargaining power of buyers
Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers.
If buyers are powerful, then they can demand cheap prices or product/service improvements to reduce profits.
Buyer power is likely to be high when:
Buyers are concentrated
Buyers have low switching costs
Buyers can supply their own inputs (backward vertical integration).

37. The Five Forces framework (6)
The bargaining power of suppliers
Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can reduce an organisation’s profits.
Supplier power is likely to be high when:
The suppliers are concentrated (few of them)
Suppliers provide a specialist or rare input
Switching costs are high (it is disruptive or expensive to change suppliers)
Suppliers can integrate forwards (e.g. low-cost airlines have cut out the use of travel agents).

38. Types of industry (1)
Monopolistic industries – an industry with one firm and therefore no competitive rivalry. A firm has ‘monopoly power’ if it has a dominant position in the market. For example, Google in the US search engine market (e.g. typical in natural resource extraction industries; defence; airline industries in small countries or developing economies; Australian airline industry with only Qantas in the 80’s-90’s).
Oligopolistic industries – an industry dominated by a few firms with limited rivalry and in which firms have power over buyers and suppliers. E.g. Boeing and Airbus dominate the market for civil aircraft. (e.g. Operating Systems – Windows, Mac OS and Linux; Internet Browsers – IE and Firefox; Smart phone O/S – Apple’s IOS and Google’s Android)
- duopolistic: only two major players in an industry

39. Types of industry (2)
Competitive industries – where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few markets are ‘perfect’ but many may have features of highly competitive markets, for example, mini-cabs in London.
Monopolistic competition – many small to medium sized firms but highly differentiated products
Perfect competition – numerous small firms with very similar products
Hypercompetitive industries – where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change (e.g. mobile phones).

40. Types of industry (2)
Perfectly competitive industries – where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few markets are ‘perfect’ but many may have features of highly competitive markets, for example, mini-cabs in London.
Hypercompetitive industries – where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change (e.g. mobile phones).

41. Implications of Five Forces analysis
Which industries/markets to enter or leave – it helps identify the attractiveness of industries.
What influence can be exerted? Identifies strategies that can influence the impact of the five forces. E.g. building barriers to entry by becoming more vertically integrated.
The forces may have a different impact on different organisations. e.g. large firms can deal with barriers to entry more easily than small firms.

42. Issues in Five Forces analysis
Defining the ‘right’ industry. Applying the model at the most appropriate level – not necessarily the whole industry. E.g. the European low-cost airline industry rather than airlines globally.
Converging industries – particularly in the high tech arenas – where industries overlap (e.g. digital industries – mobile phones/cameras/mp3 players).
Complementary organisations – which enhance the attractiveness of a business to customers or suppliers. Microsoft Windows and McAfee computer security systems are complementors. This can almost be considered as a sixth force.

43. Type of industry: Supermarkets in Australia
Would you consider this industry, ‘supermarkets and grocery stores’:
Monopolistic industry?
Oligopolistic/Duopolistic?
Hypercompetitive industry?
Perfectly competitive industry?

44. Type of Industry: Duopoly/Oligopoly
Source: IBISWorld

45. Supermarket and grocery stores in Australia: Duopoly/Oligopoly
Power of rivals over both suppliers and buyers
Profitable industry
Highly competitive (price & advertising wars are not uncommon)
Rivals as barriers to entry by themselves

46. Woolworths (Australia)
Gross Domestic Product (GDP) in 2012:
Bhutan: US$2 Billion (pop. 725T)
Laos: US$9 Billion (pop. 6M)
Cambodia: US$14 Billion (pop. 15M)
Congo: US$13 Billion (pop. 75M)
2012 Revenue
A$32.4 Billion
(US$30 Billion)
870 stores
190T staff

47. The industry life cycle

48. Supermarket and grocery stores in Australia: Mature stage of the ILC
Growing but slowly
Standard products (basic commodities; fast moving consumer goods)
Product and brand rationalisation
Established technology and processes
Total market acceptance of products/brands
Number of players have stabilised

49. Strategic groups
Strategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.
These characteristics are different from those in other strategic groups in the same industry or sector.
There are many different characteristics that distinguish between strategic groups.
Strategic groups can be mapped on to two- dimensional charts – maps. These can be useful tools of analysis.

50. Characteristics for identifying strategic groups

51. Strategic groups in the Indian pharmaceutical industry
Source: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International Management, vol. 13 (2009), pp. 338–55.

52. Strategic groups in the US Airline Industry

53. Strategic Groups in the Australian Supermarket Industry
Broad/Mega Assortment/One Stop
Coles
Woolies
CostCo
ALDI
IGA
Low price/self-service
Premium service/high price
David Jones FoodHall
Limited/Specialty Shopping 53

54. Uses of strategic group analysis
Understanding competition – enables focus on direct competitors within a strategic group, rather than the whole industry.
Analysis of strategic opportunities – helps identify attractive ‘strategic spaces’ within an industry.
Analysis of ‘mobility barriers’ – i.e. obstacles to movement from one strategic group to another. These barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position in a strategic group.

55. PORTER’S FRAMEWORK FOR COMPETITOR ANALYSIS

56. Competitive Profile Matrix (CPM) (David 2009)
Identifies firm’s major competitors and their strengths & weaknesses in relation to a sample firm’s strategic positions Critical success factors include internal and external issues

57. An Example Competitive Profile Matrix (David 2009)

58. Market segments
A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.
Where these customer groups are relatively small, such market segments are called ‘niches’.
Customer needs vary. Focusing on customer needs that are highly distinctive is one means of building a secure segment strategy.
Customer needs vary for a variety of reasons – these factors can be used to identify distinct market segments.
Not all segments are attractive or viable market opportunities – evaluation is essential.

59. Bases of market segmentation

60. Who are the strategic customers?
A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.
Examples:
For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers, not the ultimate consumer.
For a pharmaceutical manufacturer it is the health authorities and hospitals, not the final patient.

61. Critical success factors (CSFs)
Critical success factors are those factors that are either particularly valued by customers or which provide a significant advantage in terms of cost.
Critical success factors are likely to be an important source of competitive advantage if an organisation has them (or a disadvantage if an organisation lacks them).
Different industries and markets will have different critical success factors (e.g. in low-cost airlines the CSFs will be punctuality and value for money whereas in full-service airlines it is all about quality of service).

62. Blue Ocean thinking
‘Blue Oceans’ are new market spaces where competition is minimised.
‘Red Oceans’ are where industries are already well defined and rivalry is intense.
Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served.

63. Chapter summary (1)
Environmental influences can be thought of as layers around an organisation, with the outer layer making up the macro-environment, the middle layer making up the industry or sector and the inner layer strategic groups and market segments.
The macro-environment can be analysed in terms of the PESTEL factors, from which key drivers of change can be identified. Alternative scenarios about the future can be constructed according to how the key drivers develop.
Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.

64. Chapter summary (2)
Industries and sectors are dynamic, and their changes can be analysed in terms of the industry life cycle, comparative five forces radar plots. In the inner layer of the environment, strategic group analysis, market segment analysis and the strategy canvas can help identify strategic gaps or opportunities.
Blue Ocean strategies characterised by low rivalry are a better means of avoiding Red Ocean with many similar rivals and low profitability.

65. Questions for Reflection:
Discuss the benefits of scenario planning for a company that operates in a highly competitive and technologically-driven industry.
Drawing on Porter’s five forces model, how would you describe the nature and intensity of competition in the global advertising industry where WRSX Group competes?
Why is it important to understand the concept of strategic groups when you conduct a competition analysis?
What are the strategic implications of a growing yet oligopolistic industry for a company that plans to enter into that industry?

66. The Exploring Strategy Model

67. Industry Macro-environment PESTEL Framework
(Key drivers for change)
External Factor Evaluation (EFE) Matrix
(Opportunities and Threats)
Porter’s Five Forces Model
Types of Industry
Industry Life Cycle
Scenario Analysis
Competitive Cycles
Industry Dynamics
Industry Structure Analysis
Competitive Profile Matrix (CPM)
Strategic Groups and Market Segments
Strategic Group Mapping
Industry
Blue Ocean Thinking
Critical Success Factors

68. MMM365 Learning Outcomes Students should be able to:
examine systematically the internal and external business environments of a firm
apply relevant theories, models, frameworks, tools, and techniques in strategy formulation, strategy implementation, and strategy evaluation in a variety of business and industry contexts
recommend strategic propositions and directions through individual and team-based decision-making
design a strategic action plan for a specific firm